Left in the Lurch by Private Loans From For-Profit Colleges
"The loans have ensnared hundreds of thousands of students, who aren’t protected by the same government safeguards carried by federal loans.
Kashia Campbell earned top grades from her patient care technician program at Florida Career College. So she was shocked to find that, upon graduation, she was blocked from the exam to get certified in the field.
The problem was a $6,500 private loan she had taken out from the college to help her cover tuition. Florida Career College demanded that she pay more of her loan before it would release her transcript, something she said she had not been told previously. The transcript was a prerequisite for the certification exam, and she ended up in a lower-paying job earning $10 an hour. Four years later, she can pay only $50 a month on her school loan.
Ms. Campbell is one of hundreds of thousands of students who have borrowed directly from for-profit colleges. These direct-lending programs have proliferated in the last decade, and almost never come with the safeguards guaranteed by federal loans. The colleges can demand payments while students are still in school. They can withhold transcripts for nonpayment. They can impose onerous interest rates, reaching into the double digits.
Many students are unable to make their monthly payments, leaving their credit ruined and their financial and professional futures in grave doubt.
Schools often offer these loans because they’re required by law to have a small portion of their revenue come from sources other than federal financial aid. For-profit schools reap billions from financial aid — grants, loans and other programs that students use to help pay for college — and the legal provisions were put in place to ensure that in an industry mired by scandal and fraudulent behavior, the colleges don’t exist only to harvest federal dollars.
The schools generally defend these loans as enabling students to pay for a college education that would otherwise be unaffordable. Jody Kent, vice president for communications and public affairs at Universal Technical Institute, said in an emailed statement that its loan program gave “students access to high-quality education.”
Direct lending by for-profit schools boomed during the Great Recession, in part because private lenders stopped or curtailed what they offered, and it has spread steadily since. Without government oversight, for-profit colleges have lent at least $4 billion, and potentially much more that has gone untracked. The colleges plan for many of these loans to go unpaid — a core feature of their business models.
It’s a practice that lending experts say ultimately places the risk on students while helping to enrich the companies running the schools.
“The high default rates and low repayment rates — they factor that in as the cost of doing business, and the students are the ones who lose out,” said Ashley Harrington, federal advocacy director for the Center for Responsible Lending. “We’re particularly worried that we’ll see more of this as the economy gets worse.”
There are now dozens of companies and colleges, which enroll tens of thousands of students, that offer direct loans, according to federal audits, Securities and Exchange Commission filings and a review of college marketing materials.
The for-profit college industry has a long history of being accused of defrauding students, including by misleading them about the job prospects a degree would bring. At least two schools, ITT Technical Institutes and Corinthian Colleges, have closed after investigations.
But others have thrived, as has their lending.
When Ms. Campbell, now 49, signed her enrollment paperwork, she assumed she would quickly get a job after graduation and have no problem paying back her loans. Instead, she said, she is now worse off. After she graduated from Florida Career College in 2016, she said, she pleaded with the campus director and bursar’s office to release her transcript but was told no. She called the International Education Corporation but got the same answer.
“I was crying like crazy,” she said. “I don’t understand it. You’re not letting me go out and get a good-paying job so I can pay you back.”
Joseph Cockrell, a spokesman for the International Education Corporation, said that while he could not comment on individual students’ financial accounts, “students must be current with their loan payments for transcript requests.” He did not respond to follow-up questions about how much a student needs to pay to be considered “current” on loan payments.
Whatever money companies are able to recoup from the loans they directly offer may matter less than the fact that the loans themselves help keep the colleges eligible to receive billions of dollars in federal financial aid.
Under a federal law known as the 90/10 rule, for-profit schools are allowed to derive a maximum of 90 percent of their total revenue from federal student aid. The remaining 10 percent must come from elsewhere, including students’ repayments on their direct loans from the college. Even if a student pays back only a fraction of the money owed to a school, it helps the institution keep the correct ratio and continue to receive federal aid.
“In the case of these loans, it’s a pretty sure bet,” said Yan Cao, a fellow at the Century Foundation, a progressive think tank, which obtained several company audits through a public records request and shared them with The New York Times and The Hechinger Report. That federal money “goes straight into the school’s hands,” Ms. Cao said.
The International Education Corporation, the company that operates Ms. Campbell’s school and 29 other campuses, was owed $33 million in repayments in 2018, according to an independent audit submitted to the federal Education Department. The company estimated that $13 million of that — or 40 percent — would never be repaid.
And in 2012, the company said that collecting all its money would be unlikely “due to the nature of the programs and credit quality of the students,” according to another independent audit.
Lincoln Educational Services Corporation, another company that runs for-profit colleges, has described how it increased its direct lending in order to help it meet the 90/10 requirement. In 2012, the company explained that it had increased the gap between tuition and what federal financial aid covers and, in turn, provided loans to students to help them fill that gap. Over the first nine months in 2012, its lending had grown more than $7 million, to $33.7 million from $26.4 million.
That year, when Jodi-Ann Clarke enrolled in the licensed practical nursing program at Lincoln Technical Institute’s campus, which has since closed, in Hamden, Conn., the full cost of attendance came to $32,189. That was far more than what federal financial aid would cover or what she could afford out of pocket.
Ms. Clarke recalls college employees giving her instructions on how to take out a loan directly from the school during the enrollment process. Colleges sometimes encourage students to sign up for loans without the students realizing what they are taking on.
“It’s really helpful to think about this as an important part of the marketing process as much as it is a student loan,” said Mike Pierce, policy director and managing counsel at the Student Borrower Protection Center, a nonprofit advocacy group focused on student debt.
Unlike Ms. Clarke’s federal loans, which started accruing interest only after she left school, her Lincoln Tech loan began requiring payments when her classes started, and the interest accumulated while she was still in school. Lincoln Tech’s administrators projected an attitude of “we’re going to get our money and we’re going to put them in debt and they’re going to have to pay us back,” Ms. Clarke said. “I just feel like they’re a money pit.”
Peter Tahinos, senior vice president of marketing for Lincoln Educational Services, said in an email that he could not comment on individual students but added that employees “provide guidance on the best options for them to finance their education.” Lincoln charges 7 percent interest on its loans. Students can choose to begin payments immediately, with interest accruing right away, or after leaving school.
Some colleges increase the burden by imposing high interest rates. Unlike federal loans, which currently have interest rates of 2.75 percent for undergraduate borrowers, loans directly from schools can far exceed that. A 2020 report by the Student Borrower Protection Center uncovered interest rates as high as 19 percent for loans offered by some schools.
Scrutiny of this practice remains low at both the state and federal levels. A survey of 75 agencies across all 50 states — including higher-education oversight agencies, attorneys general and departments of finance or banking — by The Hechinger Report, a nonprofit education news organization, found that few places tracked any information about school-offered loans. In fact, in the vast majority of states, higher-education authorizers don’t require colleges to report plans for such programs.
Universal Technical Institute, a publicly held chain of 12 campuses across eight states, told its investors in its 2020 annual report that “changes in laws or public policy could negatively impact the viability of our proprietary loan program and cause us to delay or suspend the program.”
But for now, there remains scant monitoring and regulation of the direct lending. Several state officials said that colleges would be subject to state laws and could be investigated if abuses were reported, but that otherwise they had no oversight of these loans. A spokesman for the federal Education Department said loans offered directly from schools fell outside the department’s purview. And since its creation in 2011, the Consumer Financial Protection Bureau has taken action against just three for-profit education companies accused of predatory or deceitful loan practices.
Ms. Campbell has been unemployed for the past year and doesn’t think she’ll ever be able to find a job that pays well in health care without a license. She worked in financial auditing before going to Florida Career College and is sending out résumés to companies to see if she can find a way back into the industry.
“I wish I could go back in time,” she said. “I never would have signed up.”